Oil prices surged on Monday to the highest level in months after Saudi Arabia extended production cuts for another month, threatening to keep inflation in the U.S. abnormally high.
West Texas Intermediate crude, the U.S. benchmark, hovered around $82 a barrel during afternoon trading, the highest level since mid-April, when prices rose to more than $83. Brent crude – the international benchmark – was up to about $85.30 a barrel, a 3% increase from the start of the year.
The spike in prices follows major supply cuts by the coalition of oil-producing countries led by Russia and Saudi Arabia, known collectively as OPEC+. The group already had in place oil output cuts of about 3.66 million barrels per day when Saudi Arabia announced that it would extend the cuts into September, further constraining supply.
Gas prices have already started to march higher as a result.
The average cost of a gallon of regular gasoline was about $3.89 on Monday, according to AAA, up more than 8% from the same time one month ago. That is the highest level since October 2022, although prices remain below the record high of $5.01 notched in June 2022.
More expensive oil – and gasoline – threaten to exacerbate stubborn inflation that is still running about two times higher than the pre-pandemic average.
“If gasoline prices continue to climb higher, the Fed will find it difficult to declare that inflation has peaked given the importance of gasoline prices with regard to consumer perceptions of long-term inflation,” said Quincy Krosby, chief global strategist for LPL Financial. “It becomes ‘sticky’ as consumers invariably – and historically – begin to anticipate higher inflation over a three-year period as prices at the pump rise.”
It could also complicate the Federal Reserve’s efforts to tame price pressures within the economy while also trying to achieve a so-called soft landing.
This is “the antithesis of what the Fed wants to see as it tries to quell the last vestiges of inflationary pressures and declare victory,” Krosby said.
The Fed approved an 11th interest rate increase at the end of July, bringing the key benchmark federal funds rate to the highest level since 2001.
It marked the 11th rate increase aimed at combating high inflation since policymakers began tightening in March 2022. Policymakers also left the door open to additional interest rate increases this year, despite a recent pullback in inflation.
“We will continue to make our decisions meeting-by-meeting based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks,” Fed Chairman Jerome Powell told reporters in July.